05/23/2012 04:35 pm ET Updated Jul 23, 2012

How Did Republicans Get to the Right of Milton Friedman?

Republicans have rejected what would come to be known as Keynesian economics since FDR created huge public works programs employing millions to drag us out of the Great Depression. Their oracle became Milton Friedman who revived classical economics, which celebrated free market policies. While Keynes believed in fiscal policy, i.e., an increase in government spending to counter recessions, Friedman would come to emphasize monetary policy, i.e., stimulating the economy through an increase in the money supply achieved by the Fed's purchase of government bonds from private banks.

According to economist Paul Krugman: "Economists with a free-market bent, then, tend to want to believe that monetary policy is all that's needed; those with a desire to see a more active government tend to believe that fiscal policy is essential." Monetary policy is seen as less interventionist than fiscal policy, and therefore, almost apolitical.

Now Republicans even reject Friedman. During the primary debates, Texas Gov. Rick Perry accused Fed chairman Ben Bernanke of "treasonous" actions for trying to stimulate the economy by increasing the money supply -- "printing money" as Perry calls it. Perry then personally threatened the Fed chairman, saying, "We would treat him pretty ugly down in Texas."

Gov. Perry's views are not outside the Republican mainstream. According to a CNN/ORC poll as told by Bruce Bartlett in The Fiscal Times, "more than a third of Republicans and almost half of Tea Party members blame the Federal Reserve very much or almost completely for current economic conditions." As Bartlett notes, what is peculiar about this view is that it blames the Fed for doing too much to stimulate the economy as opposed to too little, as most economists believe.

In fact, when Bernanke announced another round of quantitative easing signaled by the Fed's purchase of long-term Treasury bonds, the entire Republican congressional leadership sent Bernanke a letter objecting to his simply doing his job. The letter warned him against taking "additional stimulative actions", reading: ""We have serious concerns that further intervention by the Federal Reserve would exacerbate current problems or further harm the U.S. economy." They specifically warned that the dollar would fall on foreign exchange markets and promote borrowing by over-leveraged consumers."

Several congressional Republicans went so far as to introduce bills to change the Fed's traditional dual mandate from one of balancing low inflation with high employment to a sole mission of combating inflation.

Ron Paul's long held views that the Fed should be abolished have become ascendant within conservative circles.

Of course, the right's fear of inflation is misplaced. Inflation will not become a problem until the economy recovers. According to Mark Thoma in The Fiscal Times: "So long as the economy continues to struggle, there will be little demand for loans to finance new investment or the consumption of durables, and the new money the Fed creates will simply pile up in banks as idle balances."

"Consumers and businesses are paying down their debts and increasing saving as fast as they can. The personal saving rate has more than doubled since 2007 and businesses are sitting on close to $2 trillion of liquid assets. Banks have $1.6 trillion in excess reserves that they cannot lend because no one is borrowing. Before the crisis, banks had less than $2 billion in excess reserves, which are idle funds on which banks earn virtually nothing." -- Bruce Bartlett

Friedman himself would agree with trying to lower long-term borrowing costs through quantitative easing, given his statement regarding Japan's economic crisis. He opined:

"Yet [the Bank of Japan's] zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity....

Now, the Bank of Japan's argument is, "Oh well, we've got the interest rate down to zero; what more can we do?" It's very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy."

So what are the costs of Republican's politicalization of Fed policy and the undercutting of its independence?

According to Pimco CEO Dr. Mohamed A. El-Erian writing in The Wall Street Journal: "The success of the latest round of quantitative easing, or QE2 as it is known, hinges on shaping public and market expectations. The more the public and investors believe the Fed is likely to keep buying bonds to depress long-term interest rates until the economy comes back, the more likely the markets are to keep long-term rates from rising." Thus, Republican antagonism toward Fed policy may tip the scales toward failure of the policy by signaling to markets such policies will be short-lived. It is a Catch 22!

During past recessions under Republican presidents, conservatives not only endorsed monetary easing, but fiscal stimulus as well. The truth is we need both monetary and fiscal policies to pull out of deep recessions and conservatives increasingly reject both. Therefore, let us reject them at the ballot box. After all, where are their ideas?